Eurozone governments want Spain's borrowing costs to be reduced by using the ECB bond buying programme, rather than using the €100bn earmarked for the country's banks, according to the Wall Street Journal.

And on that note, it's time to close down for the evening. Thanks for all your comments, and we'll be back tomorrow to cover the start of the two day EU summit.

Updated at 5.59pm BST

5.37pm BST

European markets close higher on optimism ahead of summit

European markets have closed broadly higher ahead of the EU summit starting on Thursday, with increased optimism on Spain and Greece helping the positive mood.

• The FTSE 100 has finished up 0.69% at 5910.91

• Germany's DAX is up 0.25%

• France's Cac has climbed 0.76%

• Italy's FTSE MIB is 1.56%& better

• Spain's Ibex is up 2.37%

Spanish and Italian bond yields have both edged lower, in the wake of Moody's deciding not to downgrade Spain's credit rating after all.

5.29pm BST

Still with Greece, our correspondent Helena Smith reports that while big companies (with Coco-Cola at the fore) may have given up on the debt-stricken country Hollywood hasn’t. She writes:

Crews, cameras, huge lorries – they are all packed into Athens’ ancient Plaka district where Drive screenwriter Hossein Amiri is making his directorial debut with the movie The Two Faces of January, based on a Patricia Highsmith thriller set in the Greek capital and Crete.

Turns out the Hollywood production, which stars Lord of the Rings star Viggo Mortensen and Kirsten Dunst, has been “a piece of cake” to film as cash-starved Greek authorities have given the Hollywood company carte blanche access to major sites – not least the once off-bounds Acropolis -- such is the desire, now, to have Greece promoted on the silver screen. “They gave us permits to the Acropolis in no time,” said Panaghiotis Stellas who is part of the production team. “We spent all day on the site and were allowed to go into parts that are rarely seen.”

Even more surprising, says Helena, when the novel, which came out in 1964, is about three Americans who cover up the murder of a police officer in Greece.

5.26pm BST

Breaking news: troika concludes mission to Greece

The troika of the EU, IMF and ECB have concluded their mission to Greece, and have agreed with the country most of the core measures needed on reform.

Those are the snaps coming from Reuters. The troika also says discussions on the remaining issues with continue via the technical representatives in the coming days.

5.01pm BST

Spain's bad bank could include non-performing consumer loans

Spain's bad bank could be widened to include not just bad property assets but also consumer loans.

Reuters is reporting economy ministry sources as saying the maximum size of the bank, set up to take over toxic real estate loans, could be €90bn. But that is a maximum, and the final figure could be considerably smaller.

4.38pm BST

A full break-up and demise of the euro remains unlikely but the risk of a Greek exit is material.

That's the view of ratings agency Fitch in a new report on the effect of a possible eurozone exit on covered bonds.

4.26pm BST

Greece "close to deal with lenders"

Greece is close to a deal with its lenders according to prime minister Antonis Samaras.

Despite the on-off talks with the troika over its austerity budget, he said in Bucharest:

I'm confident we're doing everying we have to do in order to get (a deal) and get it soon, so that we can move towards a recovery.

(Report from Reuters)

Updated at 4.55pm BST

4.13pm BST

Finnish PM backs credit line for Spain

Finnish prime minister Jyrki Katainen seems to have come out in favour of the idea of Spain getting a precautionary credit line, rather than needing a full bailout.

According to a Bloomberg report, he said In Bucharest (where a meeting of centre right parties is being held):

If Spain decides to ask for some sort of bailout, then Europe should be ready to act -- and I’m sure they will not need a full program like Ireland or Portugal, and instead they might need some sort of a precautionary program. The main focus now should be that Spain remains in the market and gets funding.

Updated at 4.17pm BST

3.46pm BST

Our Europe editor Ian Traynor has analysed the criticisms of German chancellor Angela Merkel by France's new president François Hollande (see earlier) ahead of the start of the EU summit. His conclusion:

Hollande's position is both strong and weak. There is the inherent strength of being a newly elected president of France. But he oversees a sclerotic economy that every month is forfeiting its competitiveness and widening the performance gap with Germany following years of failure by all French leaders to reform. If he can tackle these taboos and turn that record around, he will be in a much stronger position vis-à-vis Berlin.

But his appeal and his warning demonstrate he is not backing down in the argument with Germany about how to make Europe fit for the future. He is also looking for a new deal with Merkel. Without that compromise, Europe's worst ever crisis will get worse yet.

Cyprus to start troika talks next week

Elsewhere in realm of Euro-bailout-land, Cyprus expects final negotiations about financial aid to start next week.

Finance minister Vassos Shiarly told reporters a figure had not been set for how much the country needed because of a difference of opinion between the government and its lenders, Reuters reported. (This sounds familiar).

There has been speculation Cyprus might need more than €10bn and Shiarly said talks with the troika would start before the end of the month:

Within the month and certainly in the coming week. Time is restricted and there is not much time left.

The country has also been in contact with the Russians about possible financial aid, according to a number of recent reports.

condemn Greek lawyers to unemployment and will ultimately cut off the ability of ordinary Greeks to have recourse to justice. They are totally unfair and it is our democratic right to oppose them which we will do.

I'm heading off now (next stop, the back row of the auditorium for this year's Wincott Lecture), so my colleague Nick Fletcher will see us home. Thanks. GW

Updated at 3.05pm BST

2.54pm BST

Eurozone is the elephant in the room: Tyrie

Andrew Tyrie MP has called the eurozone crisis the "elephant in the room"and one of the reasons that banks are having difficulty restoring their balance sheets (my colleague Jill Treanor reports)

The conservative MP who chairs the Treasury select committee told theBritish Bankers Association today that he had been busy reading the IMF world economic outlook and decided it was very gloomy.

Jill adds:

And even more gloomily, Willem Buiter of Citigroup has declared that there is "no capital (banks) can hold" against a total break up of the eurozone.

Not much to cheer about then.

Updated at 2.54pm BST

2.16pm BST

Back to Athens, where our Helena Smith has found an interesting nugget about Greece's bailout payments in the latest document released by the Athens government.

In an informal document produced late on Tuesday, the finance ministry insisted that it expected the country to receive its next installment of bailout funds – at €31.5bn crucial to recapitalizing banks and vitalizing the liquidity-starved Greek economy -- by next month.

She writes:

“We expect the entire installment sometime around the middle of November. The [troika’s] debt sustainability report is expected before the American elections. There are ways to ensure sustainability. The most important parameter is the suppositions we make about the Greek economy’s development,” declared the document which said a compromise solution had even been found over the controversial issue of predicting what next year’s recession would be with both sides settling on 4.2 %.

"It is for the finance ministry to see to it that the next installment comes to Greece. That means that by definition we have the first say in these negotiations.”

But despite the insistence that the breakdown in talks earlier on Tuesday has now been repaired, there are few who are convinced, Helena adds.

Many MPs in the three parties backing the conservative-led coalition have said, openly, that they will not endorse recession-inducing measures that will take Greece back decades when they eventually are put to parliament for a vote.

The main opposition Syriza party blasted Antonis Samaras’ fragile coalition for of simply going through the motions of negotiating austerity measures that will “annihilate the Greek people", adding:

Greek society has yet again today watched another theatrical performance given in particularly dramatic tones.

1.56pm BST

IMF urging Italy to seek help?

IMF chief economist Olivier Blanchard's comments to Italian paper Il Corriere della Sera (see 9.30am) are being taken as a signal that the Fund wants Italy to seek financial help.

As I mentioned earlier, Blanchard argued that it was essential to devise "a plan for the two countries of the periphery". That, some commentators believe, is a clear signal to Italy to join Spain in seeking help from the EU to draw a line under the euro crisis.

The controversial IMF adviser, who recently upset Germany and the UK by announcing that austerity hurt economic growth by more than previously thought, said it was crucial to have a funding plan for both countries.

Without a line of credit to Rome from the EU and the IMF, the fear is that Italy will face the same investor backlash as that suffered by Spain. Mario Monti is adamant Italy is in a stronger position, but what is interesting is that Blanchard disagrees.

At the IMF's annual meetings in Tokyo last week it was obvious that European leaders were being beaten up verbally behind closed doors over their handling of the Greek/Spain bailout debacle. If Italy becomes another domino after a Spanish bailout the anger could be uncontainable (to use a word adopted by Bank of England deputy Paul Tucker in relation to another banking crisis).

Monti has been keeping a rather low profile recently -- letting Mariano Rajoy 'enjoy' the spotlight instead. But if Spain does seek help, attention may switch back to Italy.

1.32pm BST

Check out our awesome eurocrisis timeline

Three years of turmoil.

It's three years this week since the eurozone crisis began.

On 19 October 2009, the new Greek government admitted that it had discovered a black hole in Greece's finances and that its deficit would be twice as big as feared.

That was the first rumblings of serious trouble in the eurozone. Since then we have seen three bailouts, umpteen politicians driven from office, public protests, stock market plunges (and rallies), nail-biting deadlines, dramatic (and occasionally turgid) Summits. And we're only 36 months in.

The graph above shows how both Spanish and Italian sovereign debt has recovered since the wild days of July. Both country's 10-year bond yields have now dropped to their lowest level since this spring.

12.12pm BST

Spanish debt insurance costs fall

Another positive signal for Spain: the cost of insuring its debt has dropped sharply today to the lowest point since July 2011.

Greek finance minister still optimistic

Over to Greece where our correspondent Helena Smith has the latest on the on-off talks over the bumper, €13.5bn package of budget cuts and structural reforms that are key to the euro zone’s weakest link receiving further rescue funds.

Helena writes:

After yet another round of marathon talks, the Greek finance minister Yiannis Stournaras emerged well after midnight Tuesday to douse speculation (fueled earlier in the day by labour ministry officials) that negotiations with envoys representing the country’s “troika” of creditors were badly off-track.

In pointed remarks clearly aimed at inter-governmental critics, the Oxford-trained economist said the finance ministry was in charge of negotiations with the EU, ECB and IMF.

Stournaras said:

“The finance ministry, which is the guardian of the economy’s stability, is not going to stop suggesting compromise solutions to all the problems that arise, even those that concern other ministries.

I remain optimistic that things will develop well.

The “open issues” that remained would be resolved in the coming days following an initiative by prime minister Antonis Samaras to personally tackle the thorny issue of labour market reforms:

In the coming days Yiannis Vroutsis [the labour minister] will propose solutions to the issues that have come up.

Finance ministry officials said further negotiations would be conducted via email with the troika whose mission chiefs leave Athens today. “They may well return although it may not be required,” the officials said. HS

11.42am BST

Euro still bouyant

The euro continues to rally on the back of Moody's decision not to downgrade Spain - it just hit a new one-month high of €1.313.

11.23am BST

Portuguese bond auction goes smoothly

Portugal held a pretty successful auction of short-term debt this morning.

The third European country to be bailed out since the crisis began saw a sharp fall in some yields, as its re-integration into the markets continues.

Here's the details.

• €1.85bn of 3, 6 and 12-month bonds sold, vs maximum target of €2bn

• Three-month bond yields fell to 1.366%, vs 2.16% last time

• Six-month bond yields rose to 1.839%, vs 1.7% last time

• Twelve-month bond yields fell to 2.1%, vs 3.5% last time

So despite the growing tension in Portugal over the government's austerity programme, its credit worthiness appears to be improving.

But Nick Spiro, bond expert at Spiro Sovereign Strategy, warns that Portugal is at a "a critical juncture":

For the time being, waning political support for the government's austerity policies is not putting upward pressure on yields. Portuguese paper is benefiting from the "Draghi effect" which continues to outweigh concerns about political and social stability in Portugal.

However, it's clear that the consensus surrounding the need for more austerity is unravelling and poses a serious threat to the bail-out agreement.

10.52am BST

Berlin: no Troika report on Greece this week

Some more interesting line out of Berlin -- Reuters' "senior German official" has said that Spain would have to accept conditions in return for an aid programme, and that the Troika would have to decide "how far conditionality goes".

Said official also said he didn't expect an interim report on Greece from the Troika – hardly surprising, after talks between the two sides broke down last night.

10.46am BST

A "senior German official" has told Reuters that Angela Merkel and her team will seek a "decisive step forwards" on economic co-operation at the EU Summit which begins tomorrow.

However a decision on banking union is NOT expected.

And the unnamed official also defended Berlin's refusal to allow early recapitalisation of European banks through the ESM, saying that it is "clear" that the agreement made in June states that this cannot happen until 'effective' banking supervision is in place.

This is exactly what François Hollande is banging on about in today's interview when he urges Berlin to stop trying to reverse June's decisions. The problem is that the two sides disagree fundamentally about what was agreed almost four months ago -- Southern states thought they had a breakthrough deal that breaks the vicious link between banks and sovereign states. Germany has been trying to unpick this ever since....

10.17am BST

HOLLANDE CHALLENGES MERKEL OVER EURO CRISIS

French president Francois Hollande has warned that tensions between France and Germany risk destroying efforts to resolve the euro crisis.

In this exclusive interview, Hollande said it was vital that Angela Merkel stopped trying to reverse the important decisions taken at the last summit in June, and accused the German chancellor of being too preoccupied with domestic politics.

Ratcheting up the pressure ahead of tomorrow's Summit in Brussels, Hollande also said he would fight German attempts to create a federalised eurozone.

UK UNEMPLOYMENT FALLS

Good news: UK unemployment has fallen.

The ILO labour force measure, released a few minutes ago, shows a 50,000 drop in the number of people out of work in the three months to August. This pushed down the jobless rate to 7.9%, from 8.1%, with 2.53m people out of work.

Youth unemployment is down by 62,000 to around 957,000.

The more timely claimant count also dropped, by 4,000 in September.

The number of people IN work hit a record high, of 29.59m.

Average pay also crept higher, up 1.7% compared to a year ago. That's an improvement, but still fails to match inflation (which came in at 2.2% yesterday).

Shaun Richards (@notayesmansecon)

The bad economic news for the UK is that the latest numbers show that real wages are still dropping by 0.5% per annum. #gfc2

BANK OF ENGLAND MINUTES

Minutes of the last MPC meeting were just released, and show that the committee voted 9-0 to leave its quantitative easing programme unchanged, and to leave interest rates at 0.5%.

But MPC members did disagree over whether more QE would be particularly effective. Here's the key quote:

Some members felt that there was still considerable scope for asset purchases to provide further stimulus. Other members, while acknowledging that asset purchases had the scope to lower long-term yields further, questioned the magnitude of the impact that lower long-term yields on corporate debt and equity would have on the broader economy at the present juncture.

In the short-term it would be crucial to have a plan for the two countries of the periphery...This would include not only an ongoing process of adjustment inside the countries but also a guarantee they can fund themselves. This would be conditional on them sticking totheir commitments.

We are almost there but not quite at that point yet.

(Quotes via Reuters)

Blanchard added that the IMF would only contribute to a Spanish bailout if it was happy with the terms of the accompanying programme. But given its recent admission that austerity is more damaging than thought, might the IMF insist on less onerous conditions?....

9.04am BST

ANALYST REACTION

Here's some more analyst reaction to Moody's decision not to downgrade Spain (see 7.40am onwards).

Mike van Dulken, Head of Research at Accendo Markets

A nagging doubt may have been erased, but it’s unlikely to mean a Spanish bailout is any nearer, hence equities halting [the FTSE 100 is now flat].

Does PM Rajoy need to ask for help? Market implied borrowing costs are already lower after ECB pledge to help, the possibility of an ESM credit line request being enough to see ECB act and now last night’s Moody’s news. Major resistance still ahead. Another EU summit looms.

Investec:

A couple of week’s back Moody’s said it saw potentially larger losses for Spanish banks under its stressed scenario, compared to the independent analysis underlying the capital requirements called for in September.

Yesterday’s statement said the negative outlook reflected that risks to the baseline scenario were high and skewed to the downside and it again warned that if the Spanish government was to lose, or very likely to lose access to private capital markets then a potential multi-notch downgrade would follow.

The confirmation of Spain’s rating reduces the likelihood of the average rating going in to sub-investment grade territory and the consequent elimination from IG indices. Funny to think it was triple-A rated just over 2 years ago.

Downgrade still an option

A Moody's senior analyst has warned that Spain will be cut to junk status if it loses access to the financial markets and is forced into a full-scale bailout.

Kathrin Muehlbronner told Reuters that:

A full program along those lines where basically the official sector provides exclusively the funding for all your requirements, that in our view is not compatible with an investment grade, and that would apply in all the cases.

So a precautionary credit line from the European Stability Mechanism (Spain's preferred option), would be OK - if that drove borrowing costs down and maintained Spain's access to the markets.

7.48am BST

WHY MOODY'S DIDN"T DOWNGRADE

In a nutshell - Moody's has concluded that Spain and the eurozone are doing JUST ENOUGH to ensure that Madrid can keep borrowing and financing its debts.

Moody's believes that the combination of euro area and ECB support and the Spanish government's own efforts should allow the government to maintain capital market access at reasonable rates, providing it with the time it needs to stabilise public debt over the next few years.

It added, though, that the threat of a debt restructuring or default will hang over Spain for years:

In Moody's view, the maintenance of market access is critical because the risk that some form of burden-sharing will be imposed on bondholders is material for those countries that rely entirely or to a very large extent on official-sector funding for an extended period of time.

MOODY'S DOESN'T DOWNGRADE SPAIN

The big news this morning is that Spain has not been downgraded to junk status.

After months of deliberations, ratings agency Moody's has decided to affirm Spain at Baa3 -- the lowest 'investment grade' rating -- with a negative outlook.

The decision is a rare piece of good news for Mariano Rajoy's government as it continues to inch towards a request for financial aid.

Mariano Rajoy. Photograph: PIERRE-PHILIPPE MARCOU/AFP/Getty Images

Moody's said three "positive developments" were behind its decision.1) the European Central Bank's decision to buy unlimited bonds of a country in distress (if it signs up for an aid programme), 2) the fact Spain is pushing on with economic reforms, 3) progress on restructuring Spain's banking sector.

The news has already sent the euro to a one-month high against the US dollar, above $1.31.

We'll be tracking all the reaction to Moody's decision this morning.

Also coming up...a Portuguese bond sale, new economic forecasts from Germany, and fresh UK unemployment data (full agenda to follow). And it's the final day before the EU Summit begins in Brussels.